The Supreme Court’s decision in K. Sashidhar v. Indian Overseas Bank and Ors.[1]addressed a critical issue in the corporate insolvency resolution process (CIRP) – i.e. the scope of judicial scrutiny over a commercial decision taken by the committee of creditors (“CoC”) to approve or reject a resolution plan.

Background

The Supreme Court passed a common judgment in appeals arising out of the decisions of the National Company Law Appellate Tribunal (NCLAT) in the matters of Innoventive Industries Limited (Innoventive) and Kamineni Steel & Power India Pvt. Limited (Kamineni) and re-emphasised the CoC’s autonomy in matters of approval or rejection of a resolution plan based on their commercial decision/judgment.

In Innoventive the resolution plan had garnered approval of only 66.57% of the CoC by voting share. The erstwhile management of Innoventive sought to set aside the rejection of the resolution plan by certain members of the CoC on the grounds of it being malicious and without valid reasons. The National Company Law Tribunal (NCLT) ordered liquidation in this case.

In Kamineni, the NCLT approved a resolution plan, holding that 78.63% of the CoC by voting share had approved the same. It did not, however, take into account the votes of the CoC who had abstained/not participated in the voting.

The NCLAT directed liquidation in both cases as the respective resolution plans had not been approved by the requisite majority of 75% (as then applicable) of the CoC.

The Supreme Court dismissed the appeals while upholding the NCLAT decisions and laid great emphasis on the CoC’s autonomy in matters of approval or rejection of resolution plans based on their commercial decision/judgment.

Judgement of the Supreme Court

The Supreme Court at the outset provided much-needed clarity on the scope of review by the NCLT, of a resolution plan “as approved” by the CoC and held that the NCLT’s jurisdiction is limited to the NCLT being satisfied that the resolution plan meets the requirements specified in Section 30(2) of the Insolvency and Bankruptcy Code, 2016 (Code). This is namely that the resolution plan contains provisions in relation to (i) priority of payments (as prescribed), (ii) management of the corporate debtor, (iii) implementation and supervision of resolution plan, and (iv) compliance with applicable law, and nothing more. Hence, the role of the NCLT while considering a resolution plan has been clearly circumscribed.

The Supreme Court further observed that the legislature, while enacting the Code, has consciously ensured that no ground is available to question the ‘commercial wisdom’ of the individual financial creditors or the collective decision of the CoC before the NCLT in approving or rejecting a resolution plan and such commercial considerations are outside the scope of judicial review. However, the Supreme Court did clarify that if the CoC were to reject a resolution plan for any of the grounds mentioned under Section 30(2) of the Code, including a decision on the eligibility of a resolution applicant under Section 29A of the Code, the said decision would be subject to judicial review.

The Supreme Court further held that the amendment to Section 30 (4) of the Code in June 2018, which introduced the requirement for the CoC to consider the feasibility and viability of a resolution plan before approval, is a mere restatement of the factors that the CoC is expected to take into consideration in any event whilst considering a resolution plan.

Additionally, the Supreme Court also held that the amendments to the Code reducing the voting percentage for approval of a resolution plan from 75% to 66%, as well as the requirement to record reasons for approval or rejection of a plan by CoC are prospective and the decisions already taken by the CoC prior to the amendment cannot be undone.

Analysis

The judgement outlines and limits the scope of challenges that can be taken against the decision made by the financial creditors/CoC in approving or rejecting a resolution plan. While the primacy of the CoC’s decisions in either approving or rejecting a resolution plan was recognised as the bedrock of the Code by the Supreme Court (as well as the Bankruptcy Law Reforms Committee) in previous rulings, this decision has put this issue beyond doubt that the commercial decision of the CoC is non-justiciable and will not be open to scrutiny by the NCLT.

While this brings much-desired clarity, a note of caution must be added that this judgement does not make all decisions or duties entrusted upon the CoC under the Code non-justiciable. As the control of a corporate debtor shifts to the creditors in insolvency, the decisions taken by the CoC in the course of the resolution process impact and affect the rights of all stakeholders. The role of the CoC in the resolution process must therefore balance responsibilities and duties towards all such stakeholders.

The recent decisions of the Supreme Court in Arcelor Mittal India Pvt. Ltd. v Satish Kumar Gupta & Ors.[2]and Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India[3] have laid emphasis on the responsibilities of the CoC to inter alia: ascertain the legality of a resolution plan and the eligibility of the resolution applicants; make all endeavors for insolvency resolution with liquidation being the last resort; and safeguard interests of other creditors and that resolution plans must provide fair equitable treatment to operational creditors. While the commercial decision of the CoC in evaluating a resolution plan is protected from judicial scrutiny, the decisions taken while performing such other responsibilities by the CoC in the course of the resolution process remain subject to challenge under Section 60 of the IBC.

This judgement is expected to reduce the time for scrutiny of resolution plans and has paved the way for faster and timely approval of resolution plans and/or commencement of liquidation by the NCLT.

* The firm represented the respondent banks in the appeals filed in respect of Innoventive Industries Limited before the Supreme Court and instructed senior counsel Mr. Shyam Divan.

National Chair and Partner in the Finance & Projects Practice at the Mumbai office of Cyril Amarchand Mangaldas. Viswanathan advises leading banks, financial institutions and private credit providers as well India’s largest corporates on financing, restructuring and infrastructure projects. He is currently advising on many insolvency proceedings under the Insolvency and Bankruptcy Code, 2016. He can be reached at l.viswanathan@cyrilshroff.com

Principal Associate in the Dispute Resolution Team at the Mumbai office of Cyril Amarchand Mangaldas. Animesh focuses on corporate insolvency, regulatory matters in relation to securities laws and corporate/commercial litigation. He can be reached at animesh.bisht@cyrilshroff.com

Senior Associate in the Dispute Resolution practice at the Delhi office of Cyril Amarchand Mangaldas. Karan has a wide range of experience in advising clients in the area of litigation and arbitration. His area of expertise includes commercial, infrastructure and real estate disputes, litigation aspect of insolvency and bankruptcy and disputes relating to the automobile sector and the environment. He can be reached at karan.khanna@cyrilshroff.com.

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